Lockdown syndrome: On virus-induced economic crisis

Lockdown syndrome: On the virus-induced economic crisis

Introduction

Official data capturing the economic impact of the nationwide lockdown are starting to pour in slowly. The country’s industrial output, as measured by the Index of Industrial Production (IIP), contracted by 16.7% in March.

This is in contrast to a growth rate of 2.7% witnessed during the same month last year.

Economic crisis

The sharp fall can largely be explained by the nationwide lockdown that was imposed by the Centre in the last week of the month. The manufacturing sector, which witnessed a contraction of about 20%, was the worst hit among the key sectors, perhaps due to disruptions in the labour market caused by the lockdown.

In terms of end-goods, capital goods and consumer durables witnessed a roughly one-third contraction in size as the sale of non-essential goods was obliterated by the unexpected lockdown.

Analysts say that industrial output is likely to fall even further in April when the economy was in complete shutdown. In fact, some estimates suggest that the economy’s overall output in the first quarter of FY21 could be cut by one-fourth and growth for the whole financial year could well turn out to be negative.

Economic recovery only be through good policies

The COVID-19 crisis being a temporary external shock, much like demonetisation in 2016 but much larger in scale, can theoretically lead to a quick bounce-back in economic activity once the lockdown is lifted.

But the actual pace of the recovery in industrial production and even the wider economy will depend on the policy environment created by the government after the crisis.

The economic rescue measures announced by the Finance Minister Nirmala Sitharaman on Wednesday, such as more loans to small and medium scale enterprises and looser credit standards, can help the recovery by allowing businesses to find their feet soon.

Obviously, the key will lie in the implementation of these measures.

The government must also ensure that bureaucratic red tape does not kill any nascent recovery at a time when businesses, whose balance sheets have been hit hard by the crisis, need the freedom to adjust to a new economic reality.

Source: TH

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